1) Accelerated depreciation allows firms to
A.receive less of the dollars of depreciation earlier in the asset’s life
B.receive more of the dollars of depreciation earlier in the asset’s life
C.not pay any taxes during an asset’s life
D.receive more of the dollars of depreciation later in the asset’s life
2) Suppose that Tan Lotion’s common shares sell for $18 per share, are expected to set
their next annual dividend at $1.00 per share, and that all future dividends are expected
to grow by 7 percent per year, indefinitely. If Tan Lotion faces a flotation cost of 12%
on new equity issues, what will be the flotation-adjusted cost of equity?
A.6.37%
B.7.06%
C.12.56%
D.13.31%
3) Which of the following is not a correct statement?
A.Treasury inflation-protected securities have fixed coupon rates
B.The federal government adjusts the par value of Treasury inflation-protected
securities at the rate of inflation
C.At maturity, investor in Treasury inflation-protected securities receives an
inflation-adjusted principal amount
D.All of these statements are correct
4) This includes any capital gain (or loss) that occurred as well as any income that you
received from a specific investment.
A.average return
B.dollar return
C.market return
D.portfolio
5) You are evaluating a project for your company. You estimate the sales price to be $50
per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2500
units in year 3 . The project has a three-year life. Variable costs amount to $10 per unit
and fixed costs are $75,000 per year. The project requires an initial investment of
$25,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $5,000. NWC requirements at the beginning of each year will be approximately 20
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 13 percent. What change in NWC occurs at the end of
year 1?
A.$13,000
B.$34,000
C.$50,000
D.$75,000
6) Buying Stock with a Market Order You would like to buy shares of International
Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24,
respectively. You place a market buy-order for 100 shares that executes at these quoted
prices. How much money did it cost to buy these shares?
A.$7.00
B.$9,617.00
C.$9,624.00
D.$19,241.00
7) The ____________ approach to computing a divisional weighted average cost of
capital (WACC) requires only that WACCs for “risky” and “relatively safe” divisions be
adjusted.
A.subjective
B.objective
C.firmwide
D.implicit
8) Bailey’s Dog Pens, Inc., with the help of its investment bank recently issued 5
million shares of new stock. The offer price on the stock was $15 per share and Bailey’s
received a total of $65 million from the stock offering. What percentage of the gross
proceeds is the investment bank charging Bailey’s Dog Pens for underwriting the stock
issue?
A.11.29%
B.12.10%
C.10.62%
D.13.33%
9) At the beginning of the month, you owned $15,500 of General Motors, $4,500 of
Starbucks, and $9,000 of Nike. The monthly returns for General Motors, Starbucks, and
Nike were 7.10 percent, -1.36 percent, and -0.54 percent. What is your portfolio return?
A.-1.12%
B.1.17%
C.2.54%
D.3.42%
10) Suppose that Papa Bell Inc.’s equity is currently selling for $95 per share, with 4
million shares outstanding. If the firm also has 80 thousand bonds outstanding, which
are selling at 91.5 percent of par ($1,000), what are the firm’s current capital structure
weights?
A.Weight of Equity = 83.85%; Weight of Debt = 16.15%
B.Weight of Equity = 81.29%; Weight of Debt = 18.71%
C.Weight of Equity = 77.80%; Weight of Debt = 12.20%
D.Weight of Equity = 65.19%; Weight of Debt = 34.81%
11) Calculating Costs of Issuing Debt R&D, Inc., needs to raise $200 million to finance
firm expansion. In discussions with its investment bank, R&D’s learns that the bankers
recommend a debt issue with an offer price of $1,000 per bond and they will charge an
underwriter’s spread of 3 percent of the gross price. How many bonds will R&D need to
sell in order to receive the $200 million they need?
A.194,000
B.200,000
C.206,000
D.206,186
12) This is the concept that a unit’s sales will follow an approximate bell-shaped curve
versus a steady sales life.
A.bell curve cycle
B.coefficient of variation
C.product life cycle
D.NWC life cycle
13) Which of the following will increase the cost of equity?
A.The firm’s share price falls 10%
B.The firm is expected to reduce its dividend
C.The firm’s corporate tax rate increases
D.None of these answers is correct
14) Your company has a 40% tax rate and has $750 million in assets, currently financed
entirely with equity. Equity is worth $50 per share, and book value of equity is equal to
market value of equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the possible values of
EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 9 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$8.56
B.$8.84
C.$8.88
D.$25.67
15) Free Cash Flow The 2010 income statement for Paige’s Purses shows that
depreciation expense is $10 million, EBIT is $25 million, EBT is $15 million, and the
tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was
$80 million and net operating working capital was $30 million. At the end of the year
gross fixed assets was $100 million. Paige’s free cash flow for the year was $20 million.
What is their end of year balance for net operating working capital?
A.$10.5 million
B.$14 million
C.$20.5 million
D.$30.5 million
16) When looking at these types of projects, one must consider any cash flows that arise
from surrendering old equipment before the end of its useful life.
A.incremental
B.replacement
C.cost-cutting
D.new
17) Law of One Price If the price of silver in England is £6.85 per ounce, what is the
expected price of silver in the United States if the spot exchange rate is $1 = £0.5426?
A.$7.3926 per ounce
B.$7.921 per ounce
C.$3.7168 per ounce
D.$12.6244 per ounce
18) Howett Pockett, Inc., needs to raise $80 million in new capital funding from a
seasoned equity offering. In discussions with its investment bank, Howett Pocket learns
that the bankers recommend a gross price of $47.50 per share and they will charge an
underwriter’s spread of $2.50. In addition, Howett Pockett must pay $3 million in legal
and other administrative expenses for the seasoned stock offering. Calculate the number
of shares of stock that Howett Pockett will need to sell to raise the $80 million.
A.1,844,445
B.1,812,007
C.1,763,415
D.1,702,369
19) Laura is considering two investments: Stock A and B. Both stocks have a P/E ratio
of 19. Stock A has an expected growth rate of 5% and stock B has an expected growth
rate of 13%. Which is the better stock and why?
A.Stock B is better because it is considered to be cheaper than Stock A
B.Stock A is better because it is expected to grow at a slower rate and therefore will be
less risky than Stock B
C.Since the P/E ratios are the same, Laura would be indifferent between the two stocks
D.None of these statements is correct
20) On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and
four-year zero-coupon Treasury security rates were as follows:
1R1 = 4.55%, 1R2 = 4.75%, 1R3 = 5.25%, 1R4 = 5.95%
Using the unbiased expectations theory, calculate the one-year forward rates on
zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.
A.Year 1: 4.95%; Year 2: 6.26%; Year 3: 8.08%
B.Year 1: 3.75%; Year 2: 6.02%; Year 3: 9.00%
C.Year 1: 4.95%; Year 2: 7.26%; Year 3: 8.08%
D.Year 1: 3.65%; Year 2: 6.32%; Year 3: 11.08%
21) You are considering an investment that is expected to pay 5% in year 1, 7% in years
2 and 3 and 9% in year 4 . If you invest $2,000 today, what will this investment be
worth at the end of the fourth year?
A.$2,501.42
B.$2,693.71
C.$2,713.04
D.$2,620.68
22) The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.00%,
and the 6-year Treasury rate is 6.20%. From discussions with your broker, you have
determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and
2.50% in Year 3 and beyond. Further, you expect that real interest rates will be 4.4%
annually for the foreseeable future. Calculate the maturity risk premium on the 3-year
Treasury security.
A.0.00%
B.0.10%
C.4.50%
D.2.60%
23) You are evaluating a product for your company. You estimate the sales price of
product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in
year 2; and 2,000 units in year 3. The project has a 3-year life. Variable costs amount to
$125 per unit and fixed costs are $150,000 per year. The project requires an initial
investment of $225,000 in assets which will be depreciated straight-line to zero over the
3-year project life. The actual market value of these assets at the end of year 3 is
expected to be $25,000. NWC requirements at the beginning of each year will be
approximately 20% of the projected sales during the coming year. The tax rate is 34%
and the required return on the project is 14%. What will the year 2 free cash flow for
this project be?
A.$940,710
B.$961,500
C.$1,081,500
D.$1,561,500
24) Which of the following statements is correct?
A.According to the unbiased expectations theory, the return for holding a 2-year bond
to maturity is equal to the nominal rate divided by the real interest rate
B.The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury
C.We usually observe the inverted yield curve
D.The rate on a 3-year Treasury can never be less than the rate on a 15-year Treasury
25) Which of the following statements is correct?
A.The Dutch auction relies on the firm’s shareholders to value the stock
B.The Dutch auction tends to attract arbitrageurs who often drive up the price
C.The Dutch auction offers the possibility that the firm will pay more than the
maximum price of the specified range
D.All of these are correct
26) In order to discount multiple cash flows to the present, one would use
A.the appropriate compound rate
B.the appropriate discount rate
C.the appropriate simple rate
D.the appropriate tax rate
27) Safety stock is referred to as the ________________.
A.Excess amounts of fixed assets kept on hand to meet unexpected shocks in demand
B.Excess amounts of accruals used to fund short-term demands for cash
C.Excess amounts of a current asset kept on hand to meet unexpected shocks in demand
D.None of these
28) This ratio measures the overall return on the firm’s assets inclusive of financial
leverage and taxes.
A.ROA
B.ROE
C.Basic earning power
D.Profit margin
29) The maximum growth rate that can be achieved by financing asset growth with
internal financing or retained earnings is called the ____________.
A.internal growth rate
B.retention rate
C.sustainable growth rate
D.operating expansion rate
30) Sprint Nextel Corp stock ended the previous year at $25.00 per share. It paid a
$2.57 per share dividend last year. It ended last year at $18.89. If you owned 650 shares
of Sprint, what was your dollar return and percent return?
A.$2,960; 11.13%
B.-$4,960; -16.13%
C.-$3,960; -15.13%
D.-$2,301; -14.16%
31) Calculating Fees on a Loan Commitment You have approached your local bank for
a start-up loan commitment for $500,000 needed to open a furniture repair store. You
have requested that the term of the loan be one-year. Your bank has offered you the
following terms: size of loan commitment = $500,000, term = 1 year, up-front fee = 30
basis points, back-end fee = 60 basis points, and rate on the loan = 10%. If you
immediately take down $250,000 and no more during the year, what is the total interest
and fees you have paid on this loan commitment?
A.$27,250
B.$28,000
C.$29,500
D.$53,000
32) Moving Cash Flows What is the value in year 15 of a $600 cash flow made in year
3 when the interest rates are 4 percent?
A.$374.76
B.$888.00
C.$960.62
D.$1,080.57
33) A 7% coupon bond has 10 years to maturity and could be called in 3 years. If the
bond is called, investors will earn 5.5%. The call premium is one year of coupon
payments. If coupon payments are made semi-annually and par value is $1,000, what is
the bond’s yield to maturity?
A.2.84%
B.3.17%
C.5.38%
D.5.69%
34) Investing for Retirement Ross has decided that he wants to build enough retirement
wealth that, if invested at 6 percent per year, will provide him with $2,500 monthly
income for 30 years. To date, he has saved nothing, but he still has 20 years until he
retires. How much money does he need to contribute per month to reach his goal?
A.$895.95
B.$902.47
C.$1,947.88
D.$2,500.00
35) Internal Growth Rate Last year Poncho Villa Corporation had an ROA of 16% and a
dividend payout ratio of 25%. What is the internal growth rate?
A.1.19%
B.13.64%
C.25.40%
D.33.33%
36) A lead bank in a syndicate, which directly negotiates with the issuing firm on behalf
of the syndicate, is referred to as the _____________.
A.Angel investor
B.Venture capitalist
C.Originating house
D.Institutional investor